Oil Prices Almost There
October 3rd, 2006Well, well, well! The price of crude oil slipped to the high $50’s this morning. It appears that our forecast for the next 1 to 2 months, in “Down, Down, Down Goes Crude Oil,” posted on September 15, 2006, has already occurred. But we have not seen the bottom yet. We still think that we will see a bottom in the “high $50’s” (above $55) in the next month, plus or minus.
Fundamental’s behind this price decline include many factors. One is the time of year when we see demand for products decline, and inventories rise. Another major factor is that Iranian President Amadinejad has been amazingly quiet since he visited the UN and the United States – no threatening speeches. And yesterday, Venzuela announced a cut in crude oil production of 50,000 bbl./day, and Nigeria announced a cut of 5%. Both of these cuts are symbolic only, and will hurt those two producing countries far worse than it will impact the crude oil market. But the next big impact will be US gasoline consumption. With Gasoline now near $2.00 per gallon, here come the SUV’s again, and away goes conservation. Again, Economics 101: cheap gas, consumption goes up. This will ultimately put the brakes on crude oil price decline.
The internet is buzzing with rumors that the Bush Administration is causing this price decline in order to impact the November elections, and as soon as the elections are over, it will let the prices rise again. Frankly, we wonder what those proponents of this theory have been smoking. In our opinion, the Bush Administration couldn’t manipulate gasoline prices if they wanted to. With all the deregulation that has occurred over the past few years, the petroleum market is indeed a free market. Prices are moved ultimately by supply and demand, although short term, they are frequently impacted by traders in the futures markets. If petroleum prices were subject to price controls (as urged by some,) then the government could exert some control over prices. But all our observations are that current prices are being determined by willing buyers and willing sellers.
Tomorrow, the DOE will post crude oil and petroleum product inventories, and we think that we can expect some modest increases. However, the traders have already discounted this rise in inventories, so the impact on prices should be minimal.